Many major issues are involved in implementing fiscal and monetary policy, such as the impact of macro environment changes on different firms and industries and the problems both managers and forecasters face in using various economic indicators to predict future economic changes. It is important to understand how these indicators affect the aggregate demand-aggregate supply model from a graphical perspective. ?
Interest rates are an important determinant of business investments and consumer spending. The Federal Reserve can significantly influence overall money demand and interest rates through the use of open market operations and setting reserve requirements. This exercise will explore this relationship using a graphical perspective.
1. Evaluate whether each of the following statements is true or false. Explain your answer and provide supporting rationale.
a. The short-run aggregate supply (SAS) curve slopes upward because households spend more as their incomes increase.
b. The long-run aggregate supply curve can never shift.
c. Either a decrease in the nominal money supply by the Federal Reserve, all else held constant, or an increase in the price level, all else held constant, will shift the aggregate demand (AD) curve to the left.
d. The Keynesian portion of the short-run aggregate supply (SAS) curve would be relevant during a recessionary situation.
e. Stagflation occurs when the aggregate demand (AD) curve shifts out on the upward sloping portion of the short-run aggregate supply (SAS) curve.
4. Evaluate whether each of the following statements is true or false. Explain your answer and provide supporting rationale, using graphs to support your answer. You can create graphs by hand and take pictures and upload them with your answers, or you may use Word or Excel, and upload the file created by these software packages.
a. If the real money demand is greater than the real money supply, interest rates must rise to reach equilibrium in the money market as institutions sell bonds to obtain more money.
b. The federal governments control of the money supply, which influences interest rates, is the primary tool that policy makers use to impact the macro economy.
c. A decrease in the reserve requirement decreases the money supply because banks have fewer reserves.
d. The real money demand curve shows how households and businesses change their spending in response to changes in the interest rate.
e. Both an increase in the nominal money supply by the Federal Reserve and an increase in the price level will cause the real money supply curve to shift to the right.
5. Write a paper that includes your answers to both Part 1 and Part 2 of the assignment.
6. You must use three sources; these sources may include scholarly sources, credible newspapers, trade journals, and/or websites. Be sure to use OCLS to find these sources.
7. Your entire assignment should be APA formatted.